Can State and Local Revenue and Expenditure Enhance Economic Growth? A Cross-State Panel Study of Fiscal Activity

Christopher Clarke () and Stephen Miller

No 2014-25, Working papers from University of Connecticut, Department of Economics

Abstract: The slow economic recovery since the 2008 financial crisis and Great Recession requires state and local governments to continue to make difficult decisions concerning which taxes to raise and which expenditures to decrease in order to maintain a balanced budget. As expenditures usually raise economic growth and taxes generally hinder it, seeking the optimum combination of taxes and expenditures encourages prosperity in a state. In this paper, we study the effects of various expenditures and revenue combinations on growth in real state personal income per capita, using a sample of annual observations from 1977 to 2010 for 49 states and the District of Columbia. We find that state and local governments overfund education and parks, recreation, and natural resources while they underfund hospitals and health spending, once netted for charges and user fees. State and local governments also underutilize corporate income taxes as a source of revenue. Finally, we also estimate non-linear and short- and long-run specifications, which generally support prior findings.

Keywords: Regional growth; state and local finance (search for similar items in EconPapers)
JEL-codes: E62 H21 H70 O40 R11 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2014-09
New Economics Papers: this item is included in nep-gro, nep-mac, nep-pbe and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2014-25

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